Aggressive pricing in a competitive renewal

That is the view of John Welch, president and CEO of XL Reinsurance America, who said that barring a major catastrophe event, the US reinsurance market should prepare for a continuing downward trajectory in rates following a competitive mid-year renewal.

Welch said that convergence capital has had both direct and indirect impacts on reinsurance pricing, with competitiveness on property cat rising significantly.

“As we renewed our property-treaty business at 6/1 and 7/1, there were clearly new entrants that were looking to get on treaties and existing participants were willing to more aggressively price their treaties. As such—and in spite of Sandy losses—cedants were able to renew as expiring or on better terms,” he said.

Welch said that competitiveness had risen “quite a bit” in recent months, with a number of Bermuda players realising that their cat aggregate might not be fully used and redeploying it to the US as a result. He predicted that “rates will continue to come down, but the profitability will be acceptable. My view is that the book remains adequately priced” in spite of these headwinds.

Welch added that while a lot is being spoken about the implications of convergence capital, it would in fact be the outcome of the hurricane season that will probably dictate the eventual level of cat rates at the end of the year.

“We are enjoying a fairly quiet hurricane season and if that persists, it will have as big—or an even more significant—impact as the influx of third party capital. If we carry on as we are going, renewals will be competitive across all lines of business and that is exactly what we expect,” he said.

That said, third party capital has helped to shape the reinsurance landscape. Placing direct pressure on pricing in property cat, its effects are also being felt in the casualty space, said Welch. While casualty reinsurance pricing was already facing a squeeze from excess capital and falling demand from cedants, the spillover effect of that capital influx is being felt in other sections of the market.

“On the casualty side we have seen some of the traditional Bermuda property cat companies becoming much more interested in writing casualty business than we have ever seen. Some are entirely new players, while others are bit players hoping to become bigger. It is the ripple effect of this new capital driving new levels of competitiveness.”

Record levels of industry capital are also helping to shape M&A activity, encouraging a closer exploration of possible synergies. With the market in developed economies “completely saturated with capital and competitors” and valuations on the up in recent months, the appetite for M&A has turned “fairly robust”.

Welch said that it takes years for larger companies to build enough volume through organic growth in order to make a difference to their bottom line. As such, there is a temptation to acquire attractive targets that can complement their existing business. “Those that are smaller, easier to digest and can be easily brought within your company culture will be the most attractive targets,” said Welch.

Not that M&A targets will make easy prey. “Publicly traded specialty insurers in the US have been very successful and are trading at premium to book, so they will be expensive. That is the flipside of buy versus build. Are you willing to pay the price needed to acquire the best specialty insurers? This environment has slowed M&A activity somewhat.”